Syndication in Real Estate

What is syndication in real estate?

A syndicate at it’s core, means a group of individuals coming together to promote a common interest. But how can this be accomplished in real estate?

Well in real estate, syndicates are formed when someone wants to buy a property, but they need help paying for it or they simply don’t want to pay for it themselves. In syndicates there are usually two roles. There is the general partner, also called the syndicator, and then there are the investors. Another term that is often used for syndicators is general partner and  investors are often referred as limited partners.

The syndicators are the ones who manage the property and run the deal. They are basically in charge of day-to-day operations. Syndicators also earn a commission for finding and completing the deal. On average, they get around 1% of the purchase price, even if they don’t contribute capital towards the transaction.

Then, there are the investors. They invest most of the money for the deal to help buy and repair the property. Investors are normally passive. They are not expected to do anything else besides contributing capital.

What makes investors want to invest with you?

Investors want to invest in a property that they know can make them money. But they also want to invest in a property that has minimal risk. Here are some key factors investors look for:

  • One of the most important factors is the track record of the general partner. People will feel more comfortable investing with someone that has been an apartment operator for many years and has bought and sold multiple properties than with someone that has limited experience.
  • Another important consideration will be the property being acquired. Savvy investors will ask for financials and require that the projected income meet or exceed certain performance metrics.
  • Sophisticated investors will also closely examine the private placement memorandum, the operating agreement, and other related documents for signs that the operator knows what they are doing. SEC regulations require certain disclosures and if these disclosures are missing or the documents are not clear, this will be a red flag that will likely result in investors not participating in the deal.

How are the profits split?

The amount of profit each individual gets can vary depending on a what each member did and how much of the deal they own. The profits can be split in many different ways. A common structure is for the syndicator to receive an acquisition fee, a management fee, and then to receive additional income once the preferred return has been disbursed to the investors. For the investors a common income model is to receive a monthly or quarterly preferred fixed return and their original capital plus additional income when the property is sold.

In summary, there’s many ways to participate in syndications and to structure the deals. At the end of the day, the most important component of syndication is the general partner and making sure that they are experienced enough to resolve the many problems that will inevitably surface when you source, purchase, manage and dispose of apartment buildings.